Crazy as it sounds, we can learn everything we need to know about dividend investing from hockey legend, Wayne Gretzky.
He racked up 61 NHL records by the time he retired, including the most goals scored, by doing one thing remarkably well: skating to where the puck was going, not where it was.
As dividend investors, we need to do the exact same thing to score. We need to "skate" to companies with the ability to keep growing their dividends, instead of companies with the highest current yields.
If you don't believe me, believe the data.
Dividend Growers Still King of the Market
In a runaway bull market, you might think that dividend stocks would fail to keep up. Think again.
So far this year, the S&P 500 Index is up a stout 23.52%. Yet the S&P High Yield Dividend Aristocrats Index is actually up more, rising 24.5% in 2013.
Mind you, these aren't any old dividend payers. You'll recall, Dividend Aristocrats are companies that have increased their dividends every year for at least 20 years.
So we're talking about dividend growers - not simply dividend payers - performing best in 2013.
This isn't some fluke, either. As I've shared before, dividend growers always perform best.
Here's the latest proof: After slicing and dicing the data from 1972 through the second quarter of 2013, Ned Davis Research found that dividend growers return an average of 9.8% per year. That compares to a return of only 7.3% per year for straightforward dividend payers.
Much like how Gretzky always skated ahead of the puck, if we want to enjoy the most profits, we need to invest ahead of any imminent dividend hikes. That way, we immediately benefit from the increased payout. It's like an instant raise.
And that's where Automatic Data Processing, Inc. (ADP) comes in…
The Next Dividend Hike Could Come Any Day Now
This payroll processing company has increased its dividend payment for 38 years in a row.
Based on the latest quarterly results, which included a 9% increase in profits - and the firm's reasonable dividend payout ratio of 59% - there's very little doubt that another increase is in store.
Now, since the announcement of a hike often comes in November, the company's 39th increase could be announced any day now. Based on last year's 10% dividend increase, the current yield on the stock could soon top 2.5%.
Naturally, that's not the only reason I consider the stock a smart investment. Here are three others:
~ Rock-Solid Balance Sheet: Unlike the Federal Reserve or the U.S. Government, ADP sports a rock-solid balance sheet, fortified by almost $1.6 billion in cash.
~ Steady Demand: ADP is the largest human resources services company in the world. Unless you think the economy is going to collapse to zero, literally, ADP is going to enjoy steady demand for its services for the foreseeable future. That means it'll be able to maintain (and keep increasing) its dividend.
~ Built-in Inflation Hedge: At some point, inflation is going to rear its ugly head again. Thankfully, ADP provides a built-in hedge. Its core business involves collecting cash from its customers and then issuing paychecks, making deposits in retirement accounts and transferring funds to pay taxes (over $1 trillion in total each year). Although it doesn't hold on to these funds for a long time, it does get to keep any interest it earns. The interest adds up, too, accounting for more than 30% of the company's pre-tax profits in some years. That means as interest rates rise to keep pace with inflation, so, too, will the income ADP earns in this manner.
Bottom line: We need to anticipate dividend growth to outperform the market. And you won't find a safer, more compelling opportunity to do so in the coming weeks than ADP. Bet on it!